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Financing a Primary vs. Vacation vs. a Rental Property

The three primary categories of residential real estate identify where the owners of each type of property live full time. This affects qualifying as it relates to interest rates, down payment requirements and credit scores. Let’s look a little closer at what distinguishes one property type from another here in the Alpharetta area.

A Primary Residence is simply a property where the owners primarily live full time. The majority of residential home loans issued today are for a primary residence and as such receive the most favorable loan terms. Government-backed home loans such as VA, FHA and USDA loans can only be used to finance an owner-occupied property. Conventional loans are also the loan-of-choice for home buyers and make up nearly two-thirds of all residential mortgage loans made today.

A Vacation or Beach property is one that is designated as a vacation home and is occupied by the owners at different times throughout the year. When financing a vacation home, most programs ask for a down payment of at least 10 percent of the sales price with little to no adjustment in rate. How does a mortgage company determine if a property is a rental property or a vacation home? There is no bona-fide litmus test but it must make sense that the property is in fact for a vacation home and not for a rental or investment property. The property must be used primarily by the owners but may still be rented out at various times over a calendar year and still be considered a vacation home.

The property must be located in an area where one might decide to take a vacation. That’s easy enough, right? Maybe a beach house along the Gulf or a mountain retreat. A lender can make a determination the property is in fact in an area where vacation properties are relatively common. What will disqualify a property as being a vacation home is being relatively close to an owner’s primary residence. A rental property across town won’t pass the test, for example.

A Rental Property will ask for a down payment of at least 20 percent but borrowers can get slightly better terms with a 25 percent down payment. Rates for a rental property can also have rates as high as 0.50 percent more than one for a primary residence. With a rental property, while there is indeed income generated from the unit, in most instances the income from the rental property cannot be used to help qualify unless the owners have owned other rental properties for two years or more.

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